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Tax on a Payment to a Testamentary Trust
- 26 January 2024
- Trusts
- The Tax Faculty Tax Specialist
This FAQ article is based on tax law for the year ending 29 February 2024.
1. Background Information
In September 2022, an employee passed away a day after giving birth. The company agreed to pay out three months of maternity leave (R75,000 * 3 = R225,000) plus R25,000 contributions from the staff. Recently, the estate lawyers confirmed the setup of a trust to use the funds for the deceased employee's daughter.
2. The Problem / Facts
What is the most tax-efficient way for the company to pay the funds to the trust or the deceased employee's daughter, and can the company deduct this donation from their income tax if they pay donation tax on it?
3. Applicable Law
Income Tax Act 1962, Sections 7, 54, 56
4. Application of the Law to the Facts
The maternity leave benefit that the employee earned is part of her remuneration. Therefore, it is subject to income tax and PAYE in the hands of the employee, regardless of whether it is paid to her estate or her daughter. The company should deduct the appropriate amount of tax from the payment and issue an IRP5 certificate. The company can claim this payment as a deduction from its taxable income, as it is an expense incurred in the production of income.
If the maternity leave payment has not accrued as a condition of employment and is solely a gratuitous gesture from the company, then it could be considered a donation.
The staff contribution is a donation made by the staff members to the employee’s daughter, and it is not a benefit or expense for the company. Therefore, the company should not deduct any tax from this payment, nor claim it as a deduction from its taxable income. The staff members who donated are liable for donations tax, which is 20% of the value of the donation, up to R30 million, and 25% of the value exceeding R30 million. However, each staff member has an annual exemption of R100 000, which means that they can donate up to this amount without paying any donation tax. The staff members should declare their donations in their tax returns and pay any donations tax due to SARS as required.
Join Carmen Westermeyer as she navigates the intricate landscape of income tax treatment for foreign exchange gains and losses.
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